* Results seen stronger than a year ago
* Stock markets rose during quarter, bond spreads narrowed
* Insurer stocks are stronger, but investors wary
* Debt crises in Europe and U.S. could hit markets
* Canadian insurers still rise and fall on markets
By Cameron French
TORONTO, Nov 4 Even if Canadian life insurers
live up to expectations by posting strong third-quarter results
this week, investors ought to think twice before piling into
their shares given the uncertain outlook for financial markets.
With debt crises in Europe and the United States pressuring
stocks and threatening another severe market downturn, analysts
say one or more of the insurers could cut profit targets when
they start reporting results on Wednesday.
The cautious tone comes even though the group has posted
year-to-date stock gains that are mostly in the double digits.
The industry's No. 3 player, Sun Life Financial Inc,
leads the insurers with a 34 percent gain, while the
top dog, Manulife Financial Corp, which owns U.S.
insurer John Hancock, is up 16 percent, though shares of both
are still at less than half of their pre-crisis values.
But that was then and this is now, analysts say. Even with
the market-beating gains this year, many think the stocks are a
"It's a real contrarian bet to stick your neck out to be
long insurance companies," said Barry Schwartz, a portfolio
manager at Baskin Financial, which sold its stake in Canadian
life insurers earlier this year.
Indeed, according to Thomson Reuters I/B/E/S, the most
common rating for each of the four main players in Canada's life
insurance industry is "hold," even though analysts agree the
stocks are extremely cheap by historical standards.
"We remain reasonably cautious and believe that additional
volatility in their shares is likely before we see any sustained
increase," Barclays Capital analyst John Aiken said in a note,
referring to Manulife and Sun Life.
Aiken is more sanguine about No. 2 Great-West Lifeco Inc,
which has less market exposure than its peers and has
not suffered to the same degree. However, he has a "neutral"
rating on the sector.
Indeed, the group's volatile results and stock performance
since the 2008 market crash would suggest caution is warranted.
This is due largely to the impact financial markets have had
on their earnings. Under Canadian accounting rules, the insurers
must add to their reserves when markets fall to ensure their
investments can meet future policy obligations.
While insurers have been busily hedging their exposure and
repositioning their more market-sensitive business lines such as
annuities, market movements still dictate to a large degree
whether the group has a strong or weak quarter.
During quarters when stocks and bond yields fall sharply,
like the third quarter of 2011 for instance, the earnings impact
can be severe. Manulife Financial took a loss of C$1.3 billion
($1.30 billion) a year ago, while Sun Life lost C$621 million.
Schwartz said these factors, combined with the challenge of
getting a handle on the insurers' labyrinthine business lines
and international operations, drove Baskin to sell its stakes in
the insurers earlier this year even though the insurers could be
poised for huge profit gains if markets shoot higher.
"Rightly or wrongly we've decided that we can get that type
of exposure by going long U.S. banking stocks," he said.
This quarter should be substantially better than a year ago,
as the S&P/TSX composite index rose 6.2 percent during
the quarter, while government bond yields crept higher from
recent record lows.
However, spreads between government and corporate bond
yields narrowed, and Manulife looks set to report another loss
after warning it August it could take a charge of C$1 billion as
part of an annual review of actuarial assumptions.
Manulife is expected to report a net loss of 31 Canadian
cents a share for the July-September period, compared with a
loss of 73 Canadian cents a year earlier. Sun Life is seen with
a profit of 39 Canadian cents a share, versus a loss of C$1.07 a
Analysts see Great-West posting a profit of 50 Canadian
cents a share, up slightly from 48 Canadian cents.
Industrial Alliance Insurance and Financial Services Inc
, the No. 4 Canadian insurer, will be the first of the
group to report, on Wednesday. Industrial Alliance's profit is
expected to rise to 71 Canadian cents a share from 52 Canadian
In addition to Manulife's expected charge, Sun Life could
take a smaller hit - perhaps C$100 million - to revise its own
actuarial assumptions, said National Bank of Canada analyst
But even a breakout quarter by the sector may be ignored by
investors, who tend to take their cues from the financial
markets, analysts say.
As well, this quarter could see one of more of the
companies abandon profit targets they set a year or more ago
when they held out hopes for a faster markets rebound.
Manulife signaled in August that it would revisit its 2015
profit goal of C$4 billion and some wonder if Sun Life may at
some point have to alter its objective of C$2 billion on
operating income, which it also expects in 2015.
Regardless of whether the insurers' results beat estimates,
Routledge said he expects a somber tone to company commentary,
reflecting the uncertain outlook.
"I suspect there won't be a lot of ra-ra," he said.